Stick or twist: should retailers switch suppliers?

Suppliers and retailers are currently faced with the prospect of having to put their prices up in response to the geopolitical and economic turbulence triggered by the global supply chain crisis and the war in Ukraine. As a result, we are increasingly seeing suppliers threaten to breach and walk away from their contracts with retailers unless they agree to a higher price point. 

This is causing a real headache for retailers, who at the same time have to protect their customer base in the midst of the cost of living crisis. The recent dispute between Heinz and Tesco – which has led to certain Heinz products disappearing from Tesco’s shelves – is a prime example of how pricing can cause conflict, with Tesco publicly stating it would not pass on “unjustifiable price increases” to its customers. 

Retailers will need to weigh up the pros and cons of their decisions and consider the best approach. 

Contractual terms 

Affected retailers should consider their contractual terms with the supplier: who can terminate, why and when; can the supply of some or all stock lines be paused; what provisions are there for a mid-term price review; and what are the ramifications if the supplier chooses to ignore the strict terms? 

This will have a major influence on the retailer’s response and whether they decide to a) escalate and pursue claims where they can, b) agree revised commercial terms or c) perhaps negotiate an exit package.

The contract position is only the starting point, however. There are a range of other factors to be considered before a retailer decides to change course, as highlighted below. 

Better the devil you know? 

A decision to switch supplier should not be taken lightly. Every business is facing the same market turbulence and there is much to be said for the familiarity that builds over time with another business – with the way they operate and their approach to risk, for example. 

Longer relationships should also mean a stronger foundation on which to negotiate new terms, which itself presents an opportunity to bring contracts up to date with current strategies and risk outlooks. 

Location is another important consideration, as each market carries its own risks, again making familiarity a key benefit. Our latest Retail Agility report – based on interviews with the UK’s top 100 retailers – revealed that the UK and the rest of Europe were among the top four locations for new suppliers over the last two years, highlighting the benefits of on-shoring or near-shoring against a backdrop of mounting challenges with global sourcing, particularly from China. 

Increased shipping costs are also becoming a key factor to consider for a supplier’s location.

Groceries Supply Code of Practice

For retailers subject to the Groceries Supply Code of Practice, careful consideration must be given to its de-listing provisions before seeking to terminate. 

Even before that stage, when faced with a request for a cost price increase a retailer should be mindful of how its actions might be viewed by the Groceries Code Adjudicator (GCA). While a request for an increase is strictly a commercial matter outside the code, the GCA has advocated seven golden rules of good behaviour, such as clear communication with suppliers and no automatic delists or fixed delist notice periods following price negotiations. 

The GCA’s recent sector survey suggests that following two years of pandemic where retailers and suppliers worked closely together and improved their relationships, the pressure from rising prices has strained relationships with a reported increase in the number of supplier complaints about de-listings. 

This is clearly an area where the GCA is going to be closely scrutinising retailer behaviour over the next twelve months and so caution is needed when formulating a response to a supplier request for a price increase.

ESG governance 

For many retailers, what previously would have been an isolated contractual issue may now have wider ramifications for their ESG positioning, especially if the outcome is to cut ties with a supplier.

Some retailers will have finely balanced ESG credentials baked into their sustainability claims and changing suppliers could significantly impact this. In a market where price is king, ESG considerations may be considered to be secondary, however organisations will need to be careful to be able to honour the public ESG commitments they have already made.

For example, the Competition and Markets Authority and Advertising Standards Authority are taking no prisoners when it comes to greenwashing. They are in the middle – or perhaps it’s only the start – of an unequivocal campaign to stop brands from profiting from green claims that are unclear or unsubstantiated. Retailers should ensure that their policies and procedures, including supplier selection, are aligned with their ESG commitments and that they are understood and followed. 

In addition to these regulatory issues, a retailer’s treatment of its suppliers can quickly become a PR issue – as we have seen in the Tesco/Heinz example. Brinkmanship can be another factor. Being seen to be protecting consumers from unreasonable price increases by suppliers is not necessarily a bad thing – even if consumer choice is (temporarily) compromised along the way. 

With every business looking to protect its margins in so far as possible, retailers faced with a supplier request for a price increase need to think carefully about how to respond.